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BRILLIANT’S Capital Budgeting 413

3. Under this method, money at all points of 3. Bg nÕ{V _|, dV©_mZ g_` Ho$ _Zr H$s d¡ë`y d
time now as well as in the future is treated ^{dî` _| {_bZo dmbo _Zr H$s d¡ë`y H$mo EH$ g_mZ
as of equal value whereas it can not be so. _mZm OmVm h¡Ÿ& AÝ` eãXm| _|, `h nÕ{V _Zr Ho$
In other words, it fails to consider time
Q>mB_ d¡ë`y H$s Cnojm H$aVr h¡&
value of money.
WHEN CASH INFLOW IS CONSTANT EVERY YEAR
O~ H¡$e BZâbmo à{Vdf© pñWa h¡

Illustration 5.1.1
Cost of a new machine is ` 1,50,000 and the expected cash inflow is ` 30,000 p.a. Life of the
machine is 7 years. Calculate pay-back period.
EH$ Z¶r ‘erZ H$s bmJV < 1,50,000 h¡ VWm Ano{jV H¡$e BZâbmo < 30,000 à{V df© h¡& ‘erZ H$m OrdZ
7 df© h¡& no-~¡H$ nr[a¶S> H$s JUZm H$s{OE&
Solution:

Cash outflow 1,50,000
PBP =  = 5 years
Cash Inflow p.a. 30,000

WHEN CASH INFLOWS ARE NOT CONSTANT EVERY YEAR
O~ H¡$e BZâbmo à{Vdf© pñWa Zht h¡

Illustration 5.1.2

Shobha Ltd. is considering to purchase a machine. Two machines A and B are available at the
cost of ` 1,20,000 each. Earnings after tax but before depreciation are likely to be as under:
emo^m {b{‘Q>oS> EH$ ‘erZ IarXZo H$m {dMma H$a ahr h¡& Xmo ‘erÝg A VWm B < 1,20,000 à˶oH$ H$s bmJV na
CnbãY h¢& Q>¡³g Ho$ níMmV² {H$ÝVw S>o{à{eEeZ Ho$ nhbo A{Zª½g {ZåZ{b{IV hmoZo H$s g§^mdZm h¡…
Year Machine A Machine B

(df©) (‘erZ A) (‘erZ B)
(`) (`)

1 50,000 20,000
2 40,000 30,000
3 30,000 50,000
4 20,000 40,000
5 20,000 40,000
Evaluate the two alternatives by using: / {ZåZ{b{IV H$m Cn¶moJ H$aHo$ Xmo {dH$ënm| H$m ‘yë¶m§H$Z H$s{OE…
(a) Pay-back period method; / no-~¡H$ nr[a¶S> ‘oWS>
(b) Post pay-back profitability method. / nmoñQ> no-~¡H$ àm°{’$Q>o{~{bQ>r ‘oWS>